Investors and tax

The taxes you’ll pay on your investments and ways to shelter your investments from tax.

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​If you hold your investments in a non-registered account

Non-registered investment accounts have no special “tax status” the way registered accounts, such as RRSPs or TFSAs, do.

All investments held in non-registered accounts are subject to tax, but not all investment income is taxed in the same way or at the same rates. Some investment income attracts less tax than others. This creates opportunities to minimize your overall taxes by using certain types of accounts to hold specific asset classes.

As an investor, you’ll pay taxes on:

interest-bearing investments

dividend-paying investments

capital gains

foreign investments.

How much tax you’ll pay depends on 4 things:

The type of investment you made

The tax laws where you live

Whether your investments are held in a tax-sheltered plan

Your income

How interest income is taxed

Any interest you earn on an investment is taxed as income at full rates. This means you pay tax on 100% of any interest income you earn. The rate you pay depends on your marginal tax rate.

How dividends are taxed

Follow these 6 steps to calculate the tax you’ll pay on investments that pay dividends.

Eligible dividends

Add up your eligible dividends. These include most dividends from Canadian public companies and certain dividends from private companies.

Multiply by 1.38. This number is your grossed-up dividends. (The amount added to the actual dividends is called the dividend gross up.)

Add your grossed-up dividends to your income for the year.

Calculate the tax on that grossed-up amount.

Claim a federal dividend tax credit of approximately 15% of the grossed-up dividends.

For dividends other than eligible dividends (for example, those paid by small business corporations) paid after 2013, the gross-up factor will be 18% and the federal dividend tax credit will be 11.0169% of the grossed-up dividends.

How capital gains from Canadian corporations are taxed

If you sell an investment for more than you paid for it, you get a capital gain. If you sell for less than you paid, you get a capital loss. At tax time, you subtract your capital losses from your gains. This gives you your net gains. You pay tax on 50% − or half − of your net gains.

How foreign investments are taxed

If you receive dividends or capital gains from investments outside Canada, they are taxed as income on your Canadian tax return. Interest-bearing investments like Certificates of Deposit (CDs) from the United States are also taxed as income. A withholding tax may be deducted from your foreign investment income. However, you may be able to claim a foreign tax credit to prevent double taxation.

Labour sponsored venture capital corporationsThe federal tax credit on investments in labour-sponsored venture capital funds, once a popular investing product, will be phased out beginning in 2015 and eliminated altogether for tax years after 2016.

3 ways to reduce your taxes

1. Invest in tax-sheltered investments and plans

You don’t pay tax on what you earn while your money is in the investment or plan, but certain withdrawals are fully taxed as income. Examples: RRSPs, RESPs, RRIFs and permanent insurance. With a TFSA, you don’t pay any tax on what you earn while your money is in the plan – or when you take it out.

To take advantage of the lower tax rates on dividends and capital gains, consider:

2. Apply capital losses to reduce tax on unsheltered capital gains

At tax time, you’ll add up all your gains and losses from buying and selling unsheltered investments. If you come out ahead, you have a net gain to report. If you lose money overall, you must declare a net loss. Only 50% of this amount is taxable. A net capital loss cannot be used to offset other sources of income.

However, you can carry a net capital loss back for 3 years to offset net capital gains in those years and claim a refund. Or, you can carry it forward indefinitely to offset future net capital gains. You can also apply your capital losses from previous years to offset new capital gains. Speak with a chartered professional accountant who specializes in income tax to help you figure out the best approach.

3. Make Canadian dividends your only source of income

If you have no other sources of income in 2014, individuals with an incorporated private company or a substantial amount of money to invest can receive an amount of Canadian dividends tax-free. The actual amount depends on the province and whether the dividends are classified as eligible or non-eligible.